The Fed released the Minutes of June 13-14 FOMC meeting today.
The minutes show an overreliance on regional report soft data and consumer confidence measures instead of hard data measures.
The Fed also firmed up its Balance Sheet Normalization Plans.
Staff Review of the Economic Situation
Total industrial production rose considerably in April, reflecting gains in manufacturing, mining, and utilities output. Automakers’ assembly schedules suggested that motor vehicle production would slow in subsequent months, but broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to modest gains in factory output over the near term.
[Mish Comment: The Fed relies on ISM and its own regional reports that have been entirely wrong for a year. It ignores Markit PMI data that has been reasonably accurate]
Real PCE rose solidly in April after increasing only modestly in the first quarter. Light motor vehicle sales picked up in April but then moved down somewhat in May. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE were flat in May, but estimated increases in these components of sales for the previous two months were revised up.
[Mish Comment: This reflects upgrades to first quarter GDP and says nothing about the second quarter.]
In addition, recent readings on key factors that influence consumer spending pointed to further solid growth in total real PCE in the near term, including continued gains in employment, real disposable personal income, and households’ net worth. Moreover, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat in May.
[Mish Comment: The Fed relies on what it believes the consumer will do rather than on what the consumer actually has done].
Staff Economic Outlook
In the U.S. economic projection prepared by the staff for the June FOMC meeting, real GDP growth was forecast to step up to a solid pace in the second quarter following its weak reading in the first quarter, primarily reflecting faster real PCE growth. On balance, the incoming data on aggregate spending were a little stronger than the staff had expected, and the forecast of real GDP growth for the current year was a bit higher than in the previous projection.
The staff saw the risks to the forecasts for real GDP and the unemployment rate as balanced; the staff’s assessment was that the downside risks associated with monetary policy not being well positioned to respond to adverse shocks had diminished since its previous forecast. The risks to the projection for inflation also were seen as roughly balanced.
Participants’ Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real output growth, the unemployment rate, and inflation for each year from 2017 through 2019 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate.
As anticipated, growth in consumer spending seemed to have bounced back from a weak first quarter, and participants continued to expect that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further.
[Mish Comment: It has?]
In light of surprisingly low recent readings on inflation, participants expected that inflation on a 12-month basis would remain somewhat below 2 percent in the near term. However, participants judged that inflation would stabilize around the Committee’s 2 percent objective over the medium term.
[Mish Comment: The Fed has stressed the medium term term for how many years now? A Decade?]
Recent readings on headline and core PCE price inflation had come in lower than participants had expected. On a 12-month basis, headline PCE price inflation was running somewhat below the Committee’s 2 percent objective in April, partly because of factors that appeared to be transitory. Participants continued to expect that, as the effects of transitory factors waned and labor market conditions strengthened further, inflation would stabilize around the Committee’s 2 percent objective over the medium term.
[Mish Comment: And how long have things been transitory? The same decade?]
Several participants expressed confidence that a series of further increases in the federal funds rate in coming years, along the lines implied by the medians of the projections for the federal funds rate in the June SEP, would contribute to a stabilization, over the medium term, of the inflation rate around the Committee’s 2 percent objective, especially as this tightening of monetary policy would affect the economy only with a lag and would start from a point at which policy was still accommodative. However, a few participants who supported an increase in the target range at the present meeting indicated that they were less comfortable with the degree of additional policy tightening through the end of 2018 implied by the June SEP median federal funds rate projections. These participants expressed concern that such a path of increases in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2 percent.
[Mish Comment: Zero participants noted the complete absurdity of the 2% inflation target, the Fed’s inability to measure inflation, the fact that inflation benefits banks, the already wealthy, and the asset holders at the expense of everyone else.]
It was also suggested that the symmetry of the Committee’s inflation goal might be underscored if inflation modestly exceeded 2 percent for a time, as such an outcome would follow a long period in which inflation had undershot the 2 percent longer-term objective. Several participants expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation that would require a rapid policy tightening that, in turn, could raise the risk of an economic downturn.
[Mish Comment: the Fed has not hit its own inflation estimates, inaccurately measured for over a decade. Yet, these clowns believe that a higher target in and of itself will actually do something.]
Normalization Plans
- For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
- For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.
- The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve’s securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.
Fed’s Balance Sheet
Chart from the Fed’s Credit and Liquidity Programs and the Balance Sheet.
At $50 billion a month, it will take about 6 years at the estimated pace to get the Fed’s balance sheet to about where it was prior to the great recession.
Obviously, the Fed’s projection does not include the possibility of a recession, a significant economic downturn, or a reversal in policy for that entire duration
The Fed’s projection won’t happen. Indeed, it’s at best 50-50 the Fed even starts this year.
Mike “Mish” Shedlock
